Q2 2022 Spectrum Brands Holdings Inc Earnings Call
Excuse me this is the operator.
Each country is scheduled to begin momentarily. Please continue to standby and thank you for your patients.
Okay.
[music].
Good day and thank you for standing by welcome to the Q2 2022.
Twin Brands Holdings, Inc Earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
I'll ask a question during the session you will need to press star one on your telephone.
Please note that today's call is being recorded.
If you require any further assistance please press star zero.
It is now my pleasure to turn the call over to Mr. Jeremy Smeltzer. Please go ahead.
Thanks, Ray and good morning, everyone. Thank you for joining us.
Welcome to spectrum brands Holdings', Q2, 2022 earnings conference call and webcast I'm, Jeremy smelter CFO spectrum brands and I will moderate today's call to.
To help you follow our comments, we have placed a slide presentation on the event calendar page in the Investor Relations section of our website at spectrum brands Dotcom.
This document will remain there following our call.
Moving to slide two of the presentation, our call will be led by David Maura, Our chairman and Chief Executive Officer myself, and Randy Lewis, our Chief operating officer.
After our opening remarks, we will conduct a Q&A.
Also on the call with US today is special cutter for my team as many of you know first of all has been supporting our IR efforts over the past two quarters since Kevin's departure today I am pleased to announce that vessel will be assuming the full time IR duties going forward. We're confident he will do a great job supporting you. All we appreciate I appreciate everyone's patience as we.
We continue to work through the transition.
Turning to slides three and four our comments today include forward looking statements, which are based upon management's current expectations projections and assumptions and are by nature uncertain.
Actual results may differ materially.
Due to that risk spectrum brands encourages you to review the risk factors and cautionary statements outlined in our press release dated May six 2022, and our most recent SEC filings and spectrum brands Holdings'. Most recent annual report on Form 10-K, and quarterly reports on Form 10-Q.
We assume no obligation to update any forward looking statement.
Also please note we will discuss certain non-GAAP financial measures in this call.
Reconciliations on a GAAP basis for these measures are included in today's press release, and 8-K filing which are both available on our website in the Investor Relations section.
I will now turn the call over to David Maura.
Well, thank you Jeremy and good morning, everybody and welcome to our second quarter earnings update.
We appreciate everybody joining us this morning.
Going to kick the call off with an overview of the company's performance.
As a reminder of our capital allocation priorities. Jeremy will then provide a more detailed financial update and then Randy will provide an operational update including the business unit results.
And if I could get everyone to turn to slide six.
Once again, we delivered top line growth this quarter. Despite some continued product availability challenges our total sales increased 6%, while organic sales, excluding the impact of FX and acquisitions increased 2%.
Despite another difficult quarter battling inflationary pressures I'm actually very excited about the balance of the year as expected our margins contracted versus prior year as input cost inflation continued to exceed our price actions. However, our gross margins improved 260 basis.
Points versus the first quarter results and as we implemented further planned price increases during the quarter.
We now expect to restore our margin structure by the middle of this current quarter.
And just to put that in perspective for everyone.
If you can recall, our continuing operations EBITDA in fiscal 2021 was about $390 million and on an annualized basis, we've had to take action to offset over $400 million of inflation just in the past 18 months.
So I'm extremely pleased by our team's ability to navigate that amount of inflation in that short of a timeframe. In my opinion is truly remarkable and it's honestly great to have a challenging first half behind us and now to be looking out towards much improve expected performance in the second half I really couldnt be more proud of the operating teams.
For navigating this.
This inflationary environment on.
On the strategic front I am excited to share that we're continuing to make progress towards our goal of evolving into a faster growing higher margin pure play global pet care at home and Garden Company. We believe we can create meaningful shareholder value with this transformation.
We continue to work towards the closing of our sale of our hardware and home improvement segment to ASO boy for $4 3 billion.
And we remain confident that the transaction will close this year.
We are simultaneously working on laying the groundwork for the eventual HBC separation from spectrum brands, which will bring us closer to our strategic vision for the company.
The acquisition of the kitchen appliance and cookware categories with Tristar brands was completed during the second quarter and the work of integrating the newly acquired business into our HBC organization is already in full swing.
Given the closure of the <unk> acquisition during the second quarter, we would like to provide an updated earnings framework.
We now expect sales growth to be in the range of mid to high teens growth and adjusted EBITDA growth to be in the mid single digit range.
As a reminder, this outlook includes just over seven months of the Tri Starr acquisition and it does not include the benefit of the peak holiday season for fiscal 'twenty two.
There are two new developments that I need to mentioned during this call that are impacting our financial results in our core business units. This year, one given the Russia, Ukraine War, we have chosen to suspend shipments to Russia.
Two the adverse weather and the late start to the home and garden season. So far this year have the potential to negatively affect full year home and garden sales in EBITDA with the impact of these two items our core business EBITDA is now expected to be flat to down a couple percentage points.
If I could get everyone to turn to slide seven.
Our capital allocation priorities remain consistent we will continue to focus on allocating capital internally to our highest return opportunities. We believe this strategy has been paying off for us as we continue to drive growth through product vitality across our business units.
Second we plan to return cash to shareholders via dividends and opportunistic share repurchases more recently, we just concluded the prior quarters $150 million stock buyback plan and we expect to significantly accelerate share repurchase activity. Once the <unk> transaction is closed.
Further we will continue to pursue disciplined and strategic M&A transactions that are both synergistic and help drive long term value creation.
In summary, we're looking forward to closing the pending <unk> divestiture recapitalizing, our company deleveraging, our balance sheet and moving to a transaction to separate our home and personal care business.
We are more confident than ever that the public markets are looking to invest and allocate capital to a more pure play global pet care and home and Garden company and these actions should result in a re rating of the valuation of our publicly traded shares.
Before I turn the call over to Jeremy I would like to take this time to thank our global commercial and supply chain teams, whose collaborative efforts have helped us achieve significant pricing actions that were necessary to minimize the impact of the unprecedented inflation headwinds that our businesses have been facing I.
I would also like to thank our global employee partners and the management team for their tireless efforts in the face of the many challenges. This company has had to overcome during the past several years. The team's success continues to demonstrate our winning culture and the successful adoption of our operating global operating model.
Now you hear more from Jeremy on the financials I will turn the call over to you Jeremy Thanks.
Thanks, David if I could get everybody to turn to slide nine for a review of our Q2 results from continuing operations.
I'll start with net sales net sales increased six 2%.
Excluding the impact of $17 million of unfavorable foreign exchange and acquisition sales of $49 million.
Organic net sales increased 2% from pricing actions on increasing freight and input cost inflation with lower comparable volumes due to product available availability issues and prior year stimulus spending.
Gross profit decreased $5 4 million and gross margin of 31, 6% declined 270 basis points from a year ago due to accelerated freight and input cost inflation pacing ahead of price increases partially offset by productivity improvements.
SG&A expense of $220 million increased 11, 9% at 27, 2% of net sales with the dollar increase driven by higher distribution and transportation costs and higher marketing and product development.
The operating loss of $8 million was driven by the gross margin decrease and higher SG&A, I mentioned and investment in strategic transactions and restructuring initiatives.
The declines in GAAP net income and diluted earnings per share were primarily driven by the operating loss offset by much lower interest expense.
Adjusted diluted EPS declined to 41.
Driven by lower operating income from the gross margin decline from inflation and higher SG&A.
Adjusted EBITDA was $79 million declining due to accelerated freight and input costs pacing ahead of pricing actions and higher distribution costs.
We offset by improved productivity.
Turning to slide 10-Q, two interest expense from continuing operations of $24 7 million.
Greece $28 million due to prior year, one time refinancing costs.
Cash taxes during the quarter of $12 3 million were $7 1 million higher than last year.
Depreciation and amortization from continuing operations of $25 7 million was $4 $5 million lower than the prior year.
Separately share in incentive based compensation decreased from $7 2 million last year to $6 $6 million this year.
Cash payments for transactions were $8 million up from $3 1 million last year.
And restructuring and related payments were $17 6 million versus $7 5 million last year.
Moving to the balance sheet. The company had a quarter end cash balance of $194 million and $308 million available on its $1 $1 billion cash flow revolver.
Total debt outstanding was approximately $3 3 billion, consisting of $2 billion of senior unsecured notes $1 $1 $7 billion of term loans and revolver draws and $98 million of finance leases and other obligations.
Additionally, pro forma net leverage was five two times compared to four seven times at the end of the previous quarter as the trailing 12 month EBITDA declined and we had an increased outstanding balance on our revolver facility to fund the Tri Starr acquisition.
During the quarter the company repurchased repurchased approximately 200000 shares for $24 million completing the previously announced $150 million <unk> one share repurchase plan.
Capital expenditures were $10 2 million in Q2 versus $9 million last year, mainly due to higher investments in our SAP implementation.
Turning to slide 11, and our expectations for 2022 as David mentioned, we're updating our earnings framework to include the impact of the Tri Starr acquisition.
Now expect reported net sales growth of mid to high teens with foreign exchange expected to have a negative impact based on current rates.
As communicated on our last call, we expect $310 million to $330 million of total inflation during the year and intend to offset the inflation through pricing and cost management actions.
Our adjusted EBITDA is now expected to grow in the mid single digits, which now includes the impact of business interruption in Russia. In addition to the impact of seven five months of the Tri Star business.
From a phasing perspective, we expect our second half margins to improve as the first half was most negatively impacted by inflation pressures on a net basis.
Depreciation and amortization is expected to be between 120 and $130 million.
Including stock based compensation of approximately 25% to $30 million.
Full year interest expense is expected to be between 95 and $105 million.
Including approximately $7 million of noncash items.
Restructuring and transaction related cash spending is now expected to be between $70 and $75 million.
Capital expenditures are expected to be between $85 million to $95 million.
We ended 2021 with approximately $725 million of usable federal Nols and expect to use substantially all of them to offset a portion of the gain on the sale of <unk> we.
We are projecting to be a U S taxpayer in fiscal 'twenty two.
Cash taxes are expected to be between $30 and $40 million and for adjusted EPS, We use a tax rate of 25% including state taxes.
Regarding our capital allocation strategy after the closure of the <unk> sale, we are targeting a near term gross leverage target of two five times and.
And after a full deployment of the Hai proceeds we are targeting two to two five times net leverage for our long term target.
Now over to Randy for a more detailed look at our operations and business unit results.
Thanks, Jeremy and thank you all for joining US again. This morning, I will review, our second quarter operations results and business unit performance, but first before I do that I'd like to provide an overview of our operating environment.
Moving to slide 13, the overall supply chain and cost environment remained challenging in the quarter in line with our expectations inflation remained high in the supply chain issues, although showing some improvement.
Continue to persist throughout the quarter.
As we discussed on the previous call our supply chain team has been focused on improving product availability. This includes enhancing our supply chain resiliency by finding alternative sources of supply chains to ensure continuity in cases of other supplier facility shutdowns.
Well as contract extensions with critical suppliers to avoid future disruptions.
All of these efforts led to higher volume inventory shipments from our suppliers in Asia. However, demand continued to outpace product availability in many of our categories as a result of delayed ocean freight.
<unk> post lunar new year, and previously low safety stock inventory levels.
As I mentioned earlier, the global supply chain is showing some improvement in lead times as well as ocean freight rates are starting to stabilize and beginning to show signs of decline.
These are promising developments, we do not anticipate a step change improvement in either lead times or ocean freight rates in the short term.
But our freight inflation outlook for the fiscal year has not materially changed.
As previously mentioned during the call. The war in Ukraine has led to the suspension of our business in Russia, starting in the middle of Q2.
The war is also driving further pressure on material cost inflation, but we anticipate most of that incremental cost to materialize to the P&L starting in fiscal 'twenty three.
Moving to slide 14.
I would like to highlight the various actions that we're taking to address these challenges first I would like to start by acknowledging the hard work completed by our commercial teams to secure significant price increases across the many channels in our marketplace I am pleased to share that over 98% of all of our planned price increases have now.
<unk> been accepted by our customers and we expect all of our planned price increases to be fully implemented by the mid third quarter.
This will drive sequential margin improvement in the second half of the fiscal year.
We'll have business specific pricing updates later on in the call.
Second we are in the process of renegotiating, our ocean freight carrier contracts with the goal of securing more freight cost predictability and more contracted carrier capacity.
And finally, we continue to focus on our customer collaboration and operational execution to ensure we can react quickly to changing customer dynamics. All of these actions are enabled by leveraging our operating model transformation towards one global supply chain team with collaboration across each of our business units and regions.
We continue to improve our delivery performance and service levels, while managing through a challenging operating environment.
Now, let's dive into the specifics for each business.
I will start with home and personal care, which is slide 15.
Reported net sales increased six 1% and organic sales decreased two 1% adjusted.
Adjusted EBITDA decreased to $10 $5 million org.
Organic net sales declined as the prior year sales were historically driven by Covid related demand supported by stimulus spending.
However, our Latin American region continues to post strong sales performance driven by higher consumer demand expanded distribution and strong performance.
Reported sales growth was aided by the addition of Tri Starr brands to our small kitchen appliances portfolio.
We have already initiated the process of integrating to Tri Starr with our legacy <unk> business and the team is very excited about the prospect of unleashing the combined potential of these two great teams and leveraging the newly acquired direct to consumer capabilities and an expanded portfolio of brands.
Organic sales declined despite continued momentum in garment care products, which again posted double digit growth. We continue to build on our number one share position in the U S government care category.
Small kitchen appliances posted declines in sales as a category had experienced increased demand during the second quarter of last year.
Overall consumer demand for kitchen, and personal care appliances is softening in the U S. As we return to more normal consumer environment consumer.
Consumer demand for these product categories. In Europe is also softening due to overall inflation pressure, which has further accelerated by the war in Ukraine.
Despite these macroeconomic challenges our products continued to perform well with consumers relative to our competitors were very excited about the new product pipeline, which now includes great products like the power excel dual neutral sealer its an innovative handheld food saver vacuum sealer with patented double <unk>.
Technology. It was just launched with a strong consumer direct to consumer marketing campaign through television and social media is doing extremely well.
The launch of our Russell Hobbs.
Tentative in group collections in the international markets is helping us achieve growth in the breakfast category.
The recent launch of our new steam Jeanie two in one iron Stever is driving growth in the garment care segment furthering our leadership there.
Our consistent commercial wins over the last two years in strategic investments gives us confidence in our plans to grow share and shelf space in our key markets.
Lower adjusted EBITDA margin was driven by accelerated freight and input cost inflation ahead of incremental pricing actions and continued investments in marketing and new product development initiatives, partially offset by productivity improvements.
As we outlined on our previous call inflationary headwinds are only partially offsetting by offset by earlier waves of pricing in the first half of the year.
The good news is that most all pricing actions that were planned to offset the forecasted inflation for fiscal year. 'twenty. Two are now accepted and will be fully implemented during the current quarter.
As a consequence of pricing actions, we expect our gross margin profit to improve throughout the quarter and even more so in the fourth quarter.
Moving to global Pet care, which is slide 16.
Consumer demand for our pet care categories remained strong, but our ability to deliver product continued to be challenged. Despite these challenges the pet care business delivered reported and organic net sales growth of 5% and two 5% respectively. Higher net sales were attributable to strong growth in companion animal offset by softness in it.
<unk>.
Pricing secured in Q1 also contributed to growth in sales value.
Q2 represented our 14th consecutive quarter of revenue growth for the business with growth across all geographies.
Our Asian suppliers have now ramped up production to above pre COVID-19 levels, but we continue to experience product availability impacts as longer shipment times prolong the inventory recovery into our warehouses. We are working hard to re establish appropriate safety stock levels and expect these efforts will lead to further improvement in <unk>.
Availability and fill rates throughout the balance of this year.
Product supply was affected by supply chain disruptions that mainly impacted the U S and Canadian markets say.
Sales growth in EMEA was driven by increases in companion animal and dog and cat food categories, Despite being negatively impacted by sales decline from Russia, including high margin aquatic products.
We continue to see strong demand for our chews and treats and other feeding nutrition segments, including our dog and cat food business in Europe .
Segments represent a significant portion of the portfolio and a representative of the long term stickiness that we believe exist in these categories.
Our overall products business declined during the quarter due to the impacts of the war in Europe , and the impact of lapping multiple stimulus events from last year in the U S. We remain encouraged by the category fundamentals within our core focus areas of food filtration and specialty live fish.
Our live fish royalty revenues and commercial aquatics businesses performed well within the quarter, which is a good indication of the overall health and long term outlook of the fish keeping hobby.
Adjusted EBITDA for the business declined to $46 million lower EBIT in the quarter was driven by increased freight and input cost inflation pacing ahead of incremental pricing actions as we had previously communicated.
Almost all of our planned pricing that we had discussed on the previous call has now been completely accepted by our customers and is in the process of being implemented we.
We anticipate all planned pricing to take effect in the middle of the third quarter.
We expect price coverage and margins to improve in the third quarter as a result.
We will achieve our full target inflation coverage and margin levels in the fourth quarter.
With the level of secured pricing in place and the additional actions being implemented we remain bullish on the business fundamentals.
And optimistic that we will deliver our fourth consecutive year of both top and bottom line growth.
Our long term focus remains on the execution of our strategy, which is centered around inspiring trust due to delivery of unique and innovative products in order to drive demand for our portfolio of leading brands.
And finally home and Garden, which is slide 17 reported and organic net sales increased 16, 5% and eight 5% respectively in the second quarter.
We delivered organic sales growth despite unfavorable weather across most of the U S, which reduced category pass during the quarter and caused customers to pause inventory builds the.
The weather had an adverse impact on the foot traffic at key retail customers, which led to slower than expected sales in both pest control and cleaning categories.
Net sales was helped by price increases.
Despite the short term weather challenges, we continue to pace with the category and expect strong customer and consumer demand as conditions turn more favorable and.
In fact, we are already beginning to see strong Pos response to warmer weather.
Specifically in the southeast and south central regions of the country over the past couple of weeks.
We remain positive on.
The outlook for the full year as most of the selling season for this business is still a bit ahead of us.
We continue to invest to deliver truly innovative consumer solutions in this business and to tell our story around the brands of spectra side Hot shot cutter Equallogic and rejuvenate.
We've also recently completed a brand refresh for our cutter and Equallogic brands, which has tested extremely positively with consumers. These brand refreshes meet the changing lives and distinct needs of todays modern families are product development driven by consumer insights continues to drive our new product portfolio. This year we are.
Particularly excited about our wheat grass killer products, one hand, it operated flipping those sprayers and accurate measure concentrate products that are now shipping into the market.
These innovations and our go to market strategy have led to significant distribution gains for the current lawn and garden season.
Adjusted EBITDA increased eight 3% driven by higher sales offset by continued investments in marketing and product development, we see higher product costs from raw materials labor and freight in line with our expectations.
To offset this additional pressure we implemented another round of price increases that went into effect in the second quarter.
Great News is that we have now implemented all planned pricing to cover the anticipated inflation for fiscal 'twenty two.
Consequently, we expect margins to improve during the second half of the year.
The integration of the rejuvenate business is now complete and we are confident that is set up for long term success as part of spectrum brands. We will also start to realize the synergy benefits from this integration starting with the third quarter results.
All in all despite the challenging weather, we feel confident with the fundamentals of the category will remain strong our home and garden business is very well positioned for success within that category in the current and future years and our investments in marketing will continue to bring new users not only to our brands, but also to the overall category.
To end my section I want to thank all of our global employees on the progress we've made on our operating model cultural advancements in our strategic initiatives.
And now back to David.
Alright, Thanks, Randy Thanks, Jeremy Thanks, everyone for joining us on the call today.
We've covered a lot of ground today so.
So let me do my best to try to give you the summary here and with our key takeaways on slide 19.
First we continue to make progress on our strategic strategic objectives of creating a higher margin faster growing spectrum brands and that business is going to be focused on pet care and home and garden consumable products. The HHR divestiture continued to progress well with the teams focused on supporting ASO boy with the regulatory review.
With the completion of the recent acquisition of the Troy store business, we're taking a significant step forward on our objectives to create a separate pure play.
Global platform, a powerful portfolio of leading brands in the home and personal care appliances space.
Our business fundamentals remain generally solid and we continue to post sales growth. Despite all the supply chain challenges as our investments in marketing and new product innovations are translating into success in the marketplace. We are taking further actions to enhance our supply chain resiliency by increasing our warehousing capacity and con.
<unk> increased ocean capacity, we believe these actions will continue to improve our product supply situation.
Most of the pricing is now in place and is expected to improve our pricing coverage for inflation and margins with each sequential quarter.
Thirdly, we are updating our earnings framework for fiscal 'twenty. Two to include the impact of the Tri Star business acquisition, and some additional headwinds from the Russia, Ukraine War and the impact of a late start to the home and garden selling season.
The majority of our pricing actions are now in place to offset most of the inflationary cost pressures and we will continue to evaluate additional countermeasures to ensure we deliver on our updated earnings framework. We will continue to leverage our operating model to execute on our winning playbook and we remain encouraged by our retail partners' enthusiasm for our category.
<unk> brands and our new product launches.
To reiterate our commitment to managing our businesses for the long term success.
I am proud of the way the team has come together to manage through these challenging times I remain confident that this management team will continue to execute with discipline to drive the profitability of our company in fiscal 'twenty two and beyond.
And I want to close by saying, Thanks again to our employees who are navigating our company successfully through these unprecedented inflationary times.
I want you to know that the future of spectrum brands remains very bright as we continue to make living better at home now I'll turn it back to Jeremy for any questions.
Thanks, David Randy you want to go ahead and kick off our Q&A process. Please.
Operator.
Rainer you there.
Apologies folks just give us a minute.
Sorry, I was on mute.
As a reminder to ask a question. Please press star one on your telephone keypad.
Your next question comes from Bob <unk> from CJS Securities.
Good morning, Thanks for taking my questions.
Hey, Bob.
Hi, Thanks for all the detail.
Certainly a lot to talk about on the last call I think you spoke a little bit about strategically building the inventory to be able to help buffer some of the supply chain issues. I was just wondering I know you spoke to this a little bit Randy but could you kind of.
Dig a little deeper and maybe summarize for US where you stand in terms of inventory is as you wanted your ability to offset the high demand in certain areas and how should how we should think about.
How that inventory build has helped or will help or where do you stand for.
Yeah, Bob I would say overall, we've made material improvements in our fill rates in the aggregate over the course of the quarter predominantly driven by again the continued investment in inventory.
But there are pockets, where both the demand as well as the supply continuing to be acute issues and the biggest issue for us is in our our global pet care business, where.
We have a discrete issues having to do with some.
Vietnam, Cambodia supply on chews and treats that we're still battling have been as we've talked about the last couple of quarters, and that's going to linger for us for a while but it's getting better every week and so where we are.
We're happy to have the solutions in place, but the problem with ocean freight timing and the 110 to 120 days is that those solutions once they're in place to take a while to get into our system and allow us to recover those inventory amounts, but I would say in.
In most other general areas of the businesses and the inventory levels are getting closer to where we want them to be.
Got it okay, great and then on HBC.
Obviously, everyone understands the inflationary pressures and stuff can you give us a sense of the timing of of margin recovery. There and then also once you do get kind of full price parity for lack of a better term whats the margin outlook with Tri Starr and if you just remind us.
How margins should trend versus historically once tri Starr is fully integrated in and you get back to kind of price parity.
Yes, listen I'll take that I think.
At the outset of the call I kind of said Hey, it's <unk>.
It's tough to report on another quarter, we were fighting inflation, but I'm Super happy that.
We're kind of turning the corner I think if you look at the business. Overall, we spent the last six months trying to fix margin structure and we believe we've got that accomplished now here in the third quarter and so I think it's not just HBC, but it's.
Basically all the different business units you should start to see some of our margin.
Expansion as we move forward here.
Look I'm looking at our at our internal numbers and I.
I see a pretty significant margin expansion for HBC as we as we get into as you know in the current quarter and then it expands a lot more into the fourth and so.
I think you could expect us to kind of return EBITDA margin to the high single digits.
As we get towards the back half of the year and then I think look I think a low double digit number has gone up on the EBITDA margin line work HBC should kind of fallout I think just to give some further color. There I think in Randy's opening remarks, you mentioned a neutral sealer.
And.
I want to give you some flavor there that the <unk> acquisition actually has a lot of legs are ready to it.
This is a product that is.
We make in our content studios.
We build infomercials with them, we put spokesman needs around that we spent a lot of money marketing.
And we're finding tremendous traction and.
I can tell you that our legacy business is not used to launching a product with zero revenues and taking it to something significant I would tell you that we've gone from kind of a zero market share there in foods dealers do.
I would call it mid teens kind of right out of the gate I'm Super excited about it as a product.
Particularly in the current environment allows you to kind of save food and.
And have those leftovers and so I think thats, particularly well timed for the current <unk>.
Economic situation with inflation and food prices.
And this is a business that I think can be tens and tens of millions and millions of dollars of new very profitable revenue, so already kind of seeing the the ability to take our legacy business.
Put it in a content commercial production facility.
Some Dr TV with it and see the consumer takeaway.
Truly exciting and it's also got a replacement bag business do it which is the recurring revenue stream kind of razor razorblade through it we've had additional success.
Color on I know, we're going to we're going to spend this unit out but I'm excited about I want just wanted to give you. Some tangible results here in the early innings of the integration we were able to take a pretty exciting blender that we had and that we felt limited with the current brands situation of the legacy portfolio, we were able to rebrand that under the power.
Trademarks and launch a new exciting blender under the <unk> brand.
Again put some put some productions of content behind it and we've got a pretty significant win there already so very promising outlook.
Those actions that I'm talking about are going to be part and parcel to increasing the margins that youre looking to and I'm looking to see manifest here in the next couple of quarters.
Okay great.
That's super exciting so thank you for that and then one last one and I'll jump back and and I suspect it may be a little.
Two recent but given the market volatility and pull back can you give us a sense of the M&A outlook. I know you have to close off side you have I don't know hundreds of things on your plate, but youre also going to have tons of cash and so what is the outlook for potential other tuck in brands and valuations become more reasonable or how are you thinking about that.
I don't I don't see valuations have come in a whole lot yet I think seller expectations are still pretty high.
I think as I look out.
Again, I'm starting to sound like a broken record on these calls, but I view, our currency as kind of the cheapest thing to acquire.
And obviously I know the risks in our business better than I know the risks.
Platform that we would acquire.
So again I think our priorities would be the day, we close as a big debt Paydown and its mentioned in the comments numerous times that we would accelerate our share repurchase activity, particularly if the stock stays at current levels.
Has the valuation that it currently does so much.
I'm much more comfortable turning my attention to.
Buying back a lot of stock.
I will tell you that I'm going to spend the summer.
With this management team with pet and home and garden probably.
<unk> outside consultants kind of re underwriting the business really looking at where our strengths weaknesses opportunities threats are and then look also competitive set tried to figure out where my blind spots might be where the hockey puck is going to be three years to five years from now because really we want to kind of present to the board in November .
Outlook for building back to kind of a $5 billion ish revenue.
And in a quarter plus EBITDA pure play pet home and Garden company, that's really the that's where.
That's what we're trying to navigate the ship here and I think it would be prudent for us to kind of do some deep dives spend three to four months really looking at what we can accomplish organically, where we need to fill some holes inorganically, let's just get smart on that.
Currency is cheap, which by that and then I think your question to me would be more pertinent on.
Maybe the November call or even early 2023, I don't I don't want to make any big moves right now want to get the balance sheet Super healthy one.
To shrink the flow and hopefully sellers' expectations come down while we're getting smarter would be my answer to that.
Okay Super that's great. Thank you so much.
Thanks, Bob.
Your next question comes from Steve powers from Deutsche Bank.
Hey, guys. Good morning, Thanks, Steve.
Steve.
Good morning.
First just a couple of cleanups.
I don't think you mentioned it if you did and I missed it I apologize, but do you have an expectation for what.
Tri Starr is contribution to fiscal 'twenty. Two EBITDA is there'll be question number. One question number two is you made some tweaks to the capex and the cash restructuring expectations for the year, maybe just a little bit more color as to the moving parts.
On those items as well that'd be great.
Sure, Yes, cash restructurings come in a little bit heavier given all the things that Bob mentioned his question, we have a lot of a lot of activities going on.
And the business planning the separate HIV planning on HBC.
And on Capex, that's really just timing as things have shifted in timing of our SAP investments. So that's really.
$5 million to $10 million shifting into next year and I think.
On the Tristar piece I really don't want to break that out look I want to spend the first year, we're going to spend a lot of money integrating it it's going to cost me a lot of cash.
I want to spend very heavily against new product launches and that's going to burn EBITDA.
So I'm not looking for the Super wonderful profitable Tri Starr right out of the gate.
I would tell you that based on how we underwrote it.
My current synergy expectations are higher.
Higher than the day, we bought it.
I will tell you that I think it's going to be a.
Very meaningful EBITDA contributor to the business in fiscal 'twenty, three but I really want to get it.
Fully integrated fully operational truly kind of.
Just one new company and I want to spend really heavily in this current market environment against some new product launches, which will very much dampen their profitability in the short term, but I think we will pay us significant dividends 'twenty three 'twenty four.
Okay.
Those synergies you think you can capture pretty quickly.
If you look at 'twenty three.
Well look I will tell you. This the next two months is going to be a lot of heavy lifting was just in Middleton for week. We've got teams all over the globe and this is a big global business.
And so theres a lot of work streams.
60 days is pretty heavy lifting here.
It's just look as I look to separate the business out and create an independent entity.
A much better served in my opinion investing heavily now.
To create a stronger earnings stream as it.
Becomes a standalone entity in future years, So that's really what I'm trying to say.
Okay, that's fair enough okay.
My other question would be.
You mentioned.
Sort of.
Building cost pressures post Russia, Ukraine.
But they probably start to impact more so exiting 'twenty two into 'twenty three and then you also talked about some of the macro.
Yeah.
Macro headwinds and fluctuations that are impacting topline.
Consumer demand in some of your businesses. So as you as you think about that like whats your thought process as to taking incremental pricing actions or what have you to two.
Counter the cost headwinds that you see accruing in the out year and what would be the timing for making those decisions look I think what I really.
Really really hope people take away on this call. So ill re under line. It is this is a company that excluding <unk> Jai at about 390 million Bucks of EBITDA last year.
<unk> that remain co has had to price for over $400 million, we've had to replace the entire earnings power of the company.
In the last 18 months and what I'm, telling you is.
I'm thrilled to kind of be through the first half because I believe we have accomplished what we need to do there.
Look freight rates are still elevated they've come down a little bit.
I think what we're trying to tell you to we're trying to be completely transparent on our base EBITDA of the core.
This Russia, Ukraine thing it happened recently, it's Super unfortunate.
We have tried to be as good a steward of our human capital there as possible and we've moved I think 34 people out of out of Ukraine, but Unfortunately, we've had to stop sales into Russia.
If I had to put a guess on it it's probably going to land somewhere in the tune of $10 million hit to EBITDA in this current fiscal year and I just.
I don't see the ability to kind of make that dividend with less than five months to go and I certainly don't want to just keep I don't want to cut marketing spend to kind of make a number and so that's that's the situation.
Situation there.
But look I would tell you we still have.
Look I think small kitchen, electrics is where youre going to see six bucks a gallon start to hurt discretionary income and people bought a lot of those products during COVID-19 and so I think thats, where you see the sales headwind developing the most in the current economic situation I think people are pretty.
I'm not here to tell you that.
Pet supplies is completely inelastic.
But I'm happy with our pricing power in pet and home and garden and I believe that people are going to continue to enjoy their patch stay around their homes and we believe that that side of the equation is going to keep a stronger demand outlook and recent Pos confirms that.
And so we're pretty bullish there I think what we're trying to say to you and I think randy's comments about global supply chain is.
Our pet demand remains really really high we have struggled with a few of our suppliers.
Now as we sit here in this conference call that inventory is in the ports its hitting our Dcs and so we're getting the fill rates up there in the back half to our customers, but they are still very very low on any sort of safety stock inventory and so we see a pretty good demand picture in pet for the balance of the year those were both but let me know if that helps.
No that helps gives me some some context I appreciate it. Thank you. Thank you both.
<unk>.
Your next question comes from Peter Grom from UBS. Your line is open.
Hey, good morning, everyone hope you're doing well so I just wanted to ask about both the <unk> transaction and the HBC separation. So maybe first I know you said you still expect the deal to close this year, which is pretty consistent with the update since December but do you know when you may be able to.
Could be in a position to provide a bit more specific timeline.
Yes.
Thinking about eight months is a pretty wide window and then just on HBC you mentioned in the release, we claimed the groundwork for an HBC separation and just kind of layering in those comments around investing heavily in the business today, just any updated thoughts around kind of the way you intend to separate that business at this stage either.
Sale, IPO or kind of a joint venture.
I mean, it looks and I don't have a crystal ball, but I would tell you I expect to have a pretty exciting August conference call and you should dial into that one I think I'm, hoping I can have a lot more clarity of that.
Okay. No that's super helpful. And then I guess I wanted to update.
The organic sales outlook and I know you mentioned home and garden weakness is kind of one of the primary reasons for the slightly lower core EBITDA guidance, and maybe where miss modeling the impact from Tristar, but the updated sales outlook doesn't really seem to imply a meaningful change to the organic sales outlook you provided last quarter. So maybe just first is there.
Right and if so kind of what are the positive offsets that are allowing you to maintain that outlook.
Yes.
The move isn't isn't real large right from low single digit growth to flat to down a couple of points on the core business. So.
Not a lot of net sales impact there.
And I would say, we have a decent level of profitability in our pet business as it relates to our Russian.
Legacy sales. So that's really why we're not seeing much of a change there I think as you look at the quarter.
We certainly left sales on the table and GPC for the product available availability issues that Randy and David discussed, which would've driven higher than that two 5% organic.
<unk> Q1, we had seven 5% organic growth and GPC and then at home and Garden, I would say versus our original expectations to start the quarter.
While we did have some growth that's actually the lightest performance that we would've expected for that business this quarter based on retailer sentiment.
Towards this season, so early in the quarter I would say our retail customers had some challenges with with transportation, they usually pick up product at our Dcs and they had some issues and then by the time those were recovered later in the quarter.
Experienced here in the Midwest, a pretty wet and cold season, all the way through March including in April and that just that just had retailers delay additional purchases. So.
Still excited about Q3 excited to see the weather pickup looks like it's going to be in the ninety's here in St. Louis next week, hopefully that carries all across the country.
POS picks up and we see a good pull through Q3 and in Q4 and we certainly have.
Invested appropriately partnering with our retail customers on having the right inventory in the right places.
Got it thanks, so much and best of luck.
Thanks Peter.
Your next question comes from Chris Carey from Wells Fargo.
Hi, good morning.
Hey, Chris.
Hey, so I just wanted to build on that end.
Just asking a similar way but.
I'm just trying to understand basically what you're embedding for the rest of the year from a supply chain improvement perspective.
Typically Pat.
On the aquatic business and then.
The other question would just be in garden right. So Pos picking up is that important to achieving your outlook or are you more or less.
Embedding that retailers are going to have to work down some inventory through the remainder of the year and that is going to remain challenging in into Q3 as well I'm just I'm trying to frame.
I appreciate the guide coming down a little bit underlying and youre going to have some catch up going into Q3, I'm just trying to frame or dimensionalize.
What what we know versus what we don't know and kind of how youre thinking about the cadence of improvement on some of these headwinds that have prevented you from providing a little bit more upside on the Q2s. That's question one.
I'll take the top line on that and then the guys can add value.
Further color.
Look we expect a really meaningful recovery to pet.
We are getting a lot of inventory into the ports that inventories flowing into our Dcs as we sit here. During this conference call. We are really looking to get our fill rates materially improve their Q3 Q4.
And so we're unclogging.
Supply chain bottleneck that has been inhibited materially the revenue and earnings power of that business and so we're looking to have a very big backup and Pat and Thats why I am excited to look forward here.
As we finish up this conference call home and garden.
Seasonal that if we had a really great week in may it would it could be.
Could that could make up for the entire month of February okay. So it's literally that pronounced.
We could make our original guidance. Okay. We're just sitting here and we're seeing and you're hedged cold and wet outside.
And we don't want to over promise and under deliver.
So based on everything I know today I'm in a conference call.
Given that we have this late start to home and garden season, we think it will be potentially a little software original plan. So that's that's what we're trying to communicate could we make it all the way back yes.
But I'd rather tell you that in August when I got it in the bag as opposed to now so I'm not I'm not hedging I'm, just giving you hey. This is the current outlook as of today. This is our best guess given a late start to the weather pattern, but I will tell you. This.
I love, our shelf position I think we're taking market share the consumers love our brands, we've turned spectra side to the number one pest control product in our channels. Our teams are excited and we got a hell of a lot of R&D comment so.
Again, I think Thats what were trying to say is we're very bullish on the fundamentals.
But yes, we see a little bit of a weather issue to the start and it would be irresponsible for me not to flag that for you.
Chris I, just want to clarify on Pat So aquatics is actually doing fine as you know we're vertically integrated most of our Aquatics and inventory is fine. There frankly is just consumer demand has come down a little bit after last year's surge in aquatic spending by consumers, it's really some of our outsource chews and treats.
Coming out of Vietnam, and Cambodia, as Youll recall, I guess around the towards the end of our last fiscal year. We had some suppliers that were shut down for three to four months.
Those are some of the fastest moving products that we have and so safety stocks got eaten into pretty quickly.
Good news is those those factories had been back online for Randy.
Two to three months, we've been we've ramped up over that.
Fiscal Q1 and into fiscal Q2, we're we've added substantial incremental capacity. So right now we're actually producing at a rate of about 150 <unk> hundred 60%.
Mr than we could have produced a year ago, but it's just taking a while to get that in.
Okay. That's all very helpful. Then just yet.
That was great.
One other clarity on political.
A little clarity on that.
Where we're seeing that.
The softness is in the hard goods and environments things like tanks and equipment.
And Thats, because we had a very large spike.
A year plus ago related to stimulus spending when we look at the consumables, which is of course.
We're most excited about the category, we continue to see that.
Holding solid demand.
So the people that have gotten into the category.
Over the last couple of years may not be expanding a lot, but they are saying and that's great for us.
Okay, Yes understood.
One quick follow up David you said the organization is working on the separation of appliances can you maybe unpack that just a little bit because it sounds like to me you are.
You're investing a lot right now and a lot of the focus is actually going into creating a business that can reaccelerate kind of like post investments or are there. Other is there other work going on to kind of separate the systems.
Create.
An environment, where the business can be fully separated outright. So does that makes sense. It seems very offensive from an investment standpoint, right now but is there I wonder if you can kind of dimensionalize. Some of the other activities that you're doing on them just around separation of that business. Thanks. So much.
So youre right on both points.
The carve out of the financials the ability to completely separate company out for a merger or spin or what have you.
That'll be done early this summer so we will be ready I would just.
It's imperative that we get this integration rate, it's imperative that we set this company up to succeed and so that's why we're taking the actions. We are over the next couple of months to really get this thing integrated and homing is one new company.
Look we.
We're tired of being disrupted we want to become the disruptor youre going to hear a lot of exciting news on this HBC business as we get ready to to take it out standard up on its own but yes, we want to make sure that we put it in the best possible footing. So that can win not just in the marketplace, but also in the public markets potentially.
Yeah.
Okay. Thanks, so much.
Thanks, Chris.
Your next question comes from Nick Zaffino from Oppenheimer.
Yes.
Sure.
I don't know if you guys can answer this but I'll give it a shot.
On the inflation side can you.
Give us maybe like what run rate inflation is right now or maybe what Mike.
Inflation is I'm, just trying to say.
Alright out what your inflation assumptions are going forward as far as the increases in inflation. So I don't know how you can answer that but if you could that would be great.
That would be helpful. Yeah, depending on the volume in the quarter, because we have a little seasonality in HBC and at home and Garden, obviously as we've discussed.
And the 80% to $85 million kind of run rate per quarter give or take.
And that should remain that way I think in the second half of the year.
Okay. So that basically assumes that there is.
Just sort of flat flat inflation.
Going going forward or that every quarter, you're going to see an incremental 85% the year before.
In the area that we have seen potential increases in Randy and David both touched on it is on some of the commodity inputs to our consumables in global Pet care. So these are mostly chews and treats a lot of it produced in Asia. So as you can imagine there is an impact on what's happening with Russia, Ukraine that that we see coming but.
There's lead times, there and we have an ability to negotiate with suppliers and Thats why we say it probably doesn't impact the P&L this year so much.
It will be an impact for next year and we're in the process of evaluating what that looks like until the earlier question, what if any additional price increases.
Need to make but we should also remind people that the improvement in margins. We're expecting in the second half comes from all of that incremental pricing that we didn't have in the first half which is a positive to the first half of next fiscal year and so I think we feel like we're positioned pretty well, but I think while we don't see a massive move in ocean freight rates.
Right now, we do see some indications that the market, including carriers have some expectations for lower rates getting into 'twenty, three 'twenty four or so.
Things seem to be decent despite.
The challenges in Russia, Ukraine.
Okay, Great and then.
Follow up can you maybe just talk about how you think that businesses might perform in a downturn in economic downturn.
You've historically been very much of a kind of a replacement product portfolio has changed.
Let's just say the last recession, but can you maybe give us kind of a framework and what to.
Or how to think about how the business might perform.
Yes.
Yes, I mean, you're right the portfolio has changed a lot. So I think that's important for everybody to think through so on the HPE side, obviously, we've talked about some form of separation.
But it is essentially a replacement business after going through the pandemic, especially on the kitchen appliance side I think on the garment care and personal care side, there is actually a little bit better dynamics right now as the world reopens, but the most important thing to do is focus on global pet care and home and garden.
And those combined businesses are 90% consumables.
And they move pretty quickly.
We have.
A good customer base and global Pet care that we expect will continue to spend on their pets.
And that's what I think the macro trends tell us globally, and then at home and Garden I think is very defensive right. The concept of moving to the south of longer seasons people living in HOA is where the yards have to look nice and frankly, we're a trade down to a more costly approach to outsourcing some of the things that our products can do for consumers. So I really like how we're positioned.
Alright, great. Thanks for the color.
Okay.
I think Ryan we'll take one more call.
Sure.
Your last question comes from Carla Casella Jpmorgan.
Oh great.
Sure.
Hey, Karla hi.
Couple of questions one on the cut back in Capex is that just driven by the fact that you are running below kind of run rate year to date or did you delay any projects there.
Yes.
We've cut a couple of small projects.
Were in areas, where we see volume declines that we've talked about on the call, but the predominant is really just timing of our SAP <unk>.
Investments shifting a little bit into 2023.
Okay, Great and then on the cost side the inflation.
Is there anything that you can hedge or can you talk about on the ocean side.
You mentioned your contracting.
Additional capacity are you seeing those rates still two times to three times or more above 2020 levels.
And do you have to lock those in and what are your thoughts there.
Yes, Carla this is Randy I would tell you on ocean freight the spot rates have come down off of peaks from earlier in the calendar year a little bit.
But the ocean freight contract opportunity is of course, I think we all agree that two years from now three years from now rates should be dramatically different and so.
Locking in for a predictability, but almost immediate benefit to us to the current spot rates is an attractive option for us. So we are evaluating.
Okay and the other in placement and please scenario items can you hedge any of that or can you say like how much of your Cogs are items that are the most defensive like I'm guessing TEP or any other key items.
Like from a market perspective.
Theres not a lot of things that we buy that we can hedge at a third party we do.
Protesting more through contractual agreements with our suppliers where possible.
That's really it for us.
Carl It's David look I think at the end of the day, where it is.
The last couple of quarters have been.
Truly unprecedented from an inflation standpoint.
Where I sit today as I'm pretty thrilled that we've done what we've done on the pricing side I think as I look at free.
Prices got Super Frothy.
Come off a little bit.
They are stable here theyre, not coming down as much as we'd like.
But I think that.
I think given what I.
On the durable side of the economy, I think theres going to be a decent amount of demand destruction as we go through the summer.
With gasoline prices and where we see the cost of money going.
And so I actually think freight rates youre going to come down significantly.
As we get into 'twenty three is my personal view.
And so.
We're going to contract for capacity is responsible players but.
We're not going to take some of these some of these contracts. We've been offered recently because we think they are excessive I think when I look at our business in terms of hedging. The reason we are repositioning the portfolio to home and garden and pet is that we have significant pricing power and demand.
Tends to be more inelastic in those consumable categories than in some other parts of the portfolio and so that's that's all of this is part and parcel with the portfolio reshaping that we're doing and.
Again, we're just excited to kind of look.
Water has been super rough and I'm, just really proud of the team for navigating through.
Pretty choppy sea.
I think it's going to remain choppy, but I really like how we've gotten the boat off a plane and were running pretty good right now so I'm excited about the back half.
Okay, that's great and I just have one follow up on them. So I love that you put out your leverage targets hauling that leverage target two to two five times.
Over five times today pro forma.
So do you have a timeframe for how long it might take to get you does it take and what does it take does it take the eight ACI sale debt pay down and price our synergies or is that.
Thereafter, you Sally to try and pay down debt.
I think we'll get there pretty quickly after closing the sale of <unk> 24 hours after.
Have you given the number of debt Paydown, I mean, I'm modeling and $1. Five is that is that a different number given that.
We haven't yet so that was that was a gross.
In the near term and look I think.
We have a good slug of pre payable debt out there now and we have a couple of years worth of callable bonds and I think so we're pretty flexible in being able to head in that direction. So we'll have more color once we actually get to.
No closing.
Okay, Great we look forward to that thanks.
Thanks, Craig.
Hey, Ray. Thank you we're going to conclude the call. We appreciate your help today. We appreciate everybody joining us first of all and I will be available today and next week for follow ups. Please feel free to E mail, either or both of us as well as the Tcs and we'll get you in the queue. Thank you have a great day.
Thank you.
And this concludes today's conference call. Thank you all for joining you may now disconnect.
[music].